SMITHS GROUP PLC - HALF YEAR RESULTS FOR 6 MONTHS ENDED 31 JANUARY 2023

Pioneers of progress - improving our world through smarter engineering

Continued progress with record growth and increased FY2023 guidance

·    Record growth - organic revenue +13.5%¹, reported revenue +25.6%, EPS² + 52.1%

o Seventh consecutive quarter of growth, equally balanced between volume and price

o Growth across all divisions, geographic regions, and major customer end markets

o 200bps of growth from new product launches with a +13.5% increase in R&D to support future as well as current growth

·    Improving execution - Smiths Excellence System ("SES") delivering clear benefits   

o Headline² operating profit growth of +27.4% with margin up +20bps to 16.1%

o +£5m operating profit contribution from SES, scaling to +£12m for FY. Expanding programme with additional resources

o ROCE³ +120bps to 15.2%, driven by strong profit generation

o Operating cash conversion³ of 63% reflecting continued investment to secure supply and support sustainable growth

·    Inspiring & empowering our People - advancing our inclusive and high-performing culture

o Further progress embedding Smiths Leadership Behaviours

o Increased investment in talent development with relaunch of our Accelerate leadership training programme

o Actively investing in numerous diversity, equity & inclusion and employee engagement initiatives

o Published inaugural Sustainability Report; introduced ESG targets into incentive compensation plans; on track to deliver FY2023 ESG targets

·    Strong balance sheet - a foundation for sustainable growth and shareholder returns

o Net debt to EBITDA of 0.8x 

o Share buyback c.90% complete

o Proposed interim dividend of 12.9p, +5%

FY2023 Guidance

·    Raising FY2023 guidance to at least 8% organic revenue growth, with moderate margin improvement

Paul Keel, Chief Executive Officer, commented:

"We continued to improve our performance in H1, delivering double digit revenue and earnings growth.  While we are still in the early days of executing our plan, we are pleased with the progress.  I congratulate and thank my 15,000 colleagues around the world for continuing to do what we do best - improving our world through smarter engineering.

With order books healthy and trading strong, we are again raising our FY2023 organic revenue growth guidance to at least 8%, with moderate margin improvement."

Upcoming events

Statutory reporting

Definitions

Presentation

The webcast presentation and Q&A will begin at 08.30 (UK time) today at:  https://www.smiths.com/investors/results-reports-and-presentations

A recording will be available from 13.00 (UK time).

Legal Entity Identifier (LEI): 213800MJL6IPZS3ASA11

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding the intentions, beliefs and/or current expectations of Smiths Group plc (the "Company") and its subsidiaries (together, the "Group") and those of their respective officers, directors and employees concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies, and the businesses operated by the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. The Company and its directors accept no liability to third parties. This document contains brands that are trademarks and are registered and/or otherwise protected in accordance with applicable law.

OUR PURPOSE

We are pioneers of progress - improving our world through smarter engineering.  Smarter engineering means helping to solve the toughest problems for our customers, our communities and ourselves.  We help to create a safer, more efficient and better-connected world. 

OUR PRIORITIES AND TARGETS

Smiths is intrinsically strong with world-class engineering, leading positions in critical markets, and distinctive global capabilities, all underpinned by a strong financial framework.  We are driving performance in line with our significant potential by focusing on three top priorities:

1) accelerating growth

2) strengthening execution and

3) doing ever more to inspire and empower our people.

The Smiths Value Engine frames our plan for delivering the medium-term targets that we have set.  We have delivered seven consecutive quarters of growth since launching our plan, including record growth in HY2023.

 The exhibit below summarises our priorities and progress:

These targets are underpinned by Smiths operational KPIs and environmental targets, including a commitment to Net Zero for Scope 1 and 2 emissions by 2040 and Net Zero for Scope 3 emissions by 2050.

HY2023 BUSINESS PERFORMANCE

The commentary below refers to Smiths Group HY2022 performance (the prior year comparator) excluding Smiths Medical, which was accounted for as 'discontinued operations' before the sale completed on 6 January 2022. 

Smiths delivered record growth in the first half of HY2023 with organic revenue up +13.5%, equally balanced between volume and price. We also delivered strong profit growth and moderate margin improvement as we manage continued supply chain uncertainties and persistent inflation.

GROWTH

Growing faster is the primary driver of unlocking enhanced value for the Group.  In HY2023 we accelerated organic revenue growth to +13.5%.

All businesses grew in the first half.  John Crane and Smiths Detection accelerated organic revenue growth as they scaled supply to convert strong orderbooks to revenue. Flex-Tek continued to deliver strong growth across all of its end markets. Smiths Interconnect's growth continued, albeit at a more moderate pace than last year's record levels.

Revenue grew +25.6% on a reported basis, to £1,497m (HY2022: £1,192m). This included +£178m organic growth and +£127m of favourable foreign exchange translation.

Strong execution to access end market opportunity is the first of our four levers for accelerating growth.

Our business operates across four major global end markets: General Industrial, Safety & Security, Energy, and Aerospace. Our strong market positions, coupled with a portfolio balanced both geographically and by end market is a distinctive long-term advantage for Smiths.

We delivered strong growth across all our end markets. Our largest market, General Industrial, which accounts for 42% of Group revenue, grew +15.4% organically in the first half. This was driven by John Crane's products in sectors such as life sciences, pulp & paper and chemical processing, and strong demand for Flex-Tek's construction products, although, as expected, this market has begun to slow during the second half. Safety & Security, which includes Smiths Detection's portfolio and Smiths Interconnect's defence products, grew over 9% in H1. Energy was our fastest-growing end market at +17.1%, with strong demand for both John Crane's original equipment ("OE") and aftermarket. Aerospace, which includes Smiths Interconnect and Flex-Tek products, grew +10.1%.

At the start of the fiscal year, we introduced a new operating model for Smiths China, empowering the local team to move more nimbly to support fast-changing customer needs. Initial results of this new structure are encouraging, as results were strong in the period.

Our second lever for faster growth is improving new product development and commercialisation.  During HY2023, we generated an incremental 200bps of growth from high impact new products including Smith Detection's next generation smart tray return system, John Crane's next generation diamond coating product offering for high-speed and high-heat applications, and Flex-Tek's novel flexible air management system. Gross Vitality, which measures the proportion of revenues coming from products launched in the last five years, increased to 29.5% (HY2022: 28.6%), demonstrating our successful commercialisation of new products.

As an industrial technology leader, new products are our lifeblood.  In HY2023 we increased R&D investment by 13.5%, to support both current and future growth   We invested £59m in R&D (HY2022: £52m), of which £41m (HY2022: £41m) was an income statement charge, £8m was capitalised (HY2022: £5m), and £10m (HY2022: £6m) was funded by customers.

Customer demand remains strong across most of our end markets.  To service this demand, as well as to support new product launches, we invested £36m in capex in the first half (HY2022: £31m) representing 1.4x depreciation and amortisation (HY2022: 1.3x). 

Our third growth lever is building out priority adjacencies.  Each of our four businesses is executing strategies to expand growth beyond their existing core market positions and ensure we capitalise on the long-term megatrends in our markets of energy transition and sustainability, increasing security needs and enhanced connectivity.  Examples in HY2023 include John Crane's growing presence in hydrogen and carbon capture markets, with over 40 active projects, and Smiths Detection's growth in its Other Security Systems segment, up +22.9% in the period supported by some notable wins in ports & borders and parcel delivery markets.

Our fourth growth lever is using disciplined M&A to augment our organic growth focus.  In January, Smiths Interconnect acquired Plastronics, a leading supplier of burn-in test sockets and patented spring probe contacts, extending our reach into an attractive Smiths Interconnect adjacency. We are benefitting from Plastronics' attractive position in ArtificiaI Intelligence, data centres and automotive end markets, and expanding Plastronics' sales globally by leveraging Smiths Interconnect's strong presence in Asia.

EXECUTION

Stronger execution is our second key priority.

In HY2023, headline operating profit grew +12.7% (+£27m) on an organic basis, and +27.4% (+£52m) on a reported basis to £241m (HY2022: £189m). 

Headline operating profit benefited from strong operating leverage in John Crane where orderbook conversion to revenue increased, driving its +24.6% profit growth and +9.0% profit growth in Flex-Tek. Smiths Detection delivered profit growth albeit at a lower margin primarily due to mix, with a very strong increase in OE sales. Smiths Interconnect's profit was down slightly against a strong comparable period last year.

Group headline operating profit margin was 16.1%, up from 15.9% in HY2022.  This reflects increased volume, positive pricing more than offsetting cost inflation, and a growing contribution from SES projects.  These positive effects were partially offset by continued investment in growth, ongoing supply chain challenges, and the mix effect of particularly strong OE growth.

Headline EPS grew +52.1%, driven by headline operating profit reported growth (+30.7%), our ongoing share buyback programme (+15.0%) and a reduction in our effective headline tax rate (+4.6%).  The headline tax charge for HY2023 of £58m (HY2022: £48m) represents an improved effective rate of 26% (HY2022: 28%). 

ROCE increased +120bps to 15.2% (HY2022: 14.0%), as the higher profitability of the Group more than offset the increase in working capital in the half.  For further detail of this calculation, please refer to note 19 of the financial statements.

Our operating cash conversion was 63% in the first half (HY2022: 93%). Headline operating cash-flow³ was £151m (HY2022: £167m).  Free cash-flow³ generation was £46m (HY2022: £91m) or 19% of headline operating profit (HY2022: 48%).  Smiths has a strong track record of over 100% cash conversion.  The reduced half year cash conversion was principally driven by inventory investments to support record first half growth and secure supply to underpin the Group's future growth.  Two of the fastest growing business in the half were Smiths Detection and John Crane, which accounted for over 85% of the Group's working capital outflow.  This investment ensured we could meet the strong customer demand and underpin the businesses' large orderbooks going in to the second half.  To address the Group's temporarily elevated working capital, targeted plans and SES projects focused on reducing inventory are underway.

We continue to make good progress embedding SES throughout our organisation. There are currently 50 Black Belt projects underway.  Projects completed in the first half generated £5m of incremental operating profit. With the number of projects scaling across Smiths, we expect SES impact to increase in the second half, bringing the full year contribution to £12m, or £25m on an annualised run-rate basis.  In addition to this, SES will generate annualised cash benefit of £20m, supporting operating cash conversion improvement moving forward.

As communicated at our FY2022 results, we are implementing a number of savings projects across the Group.  These projects are progressing as anticipated with a £7m benefit in the first half.  We continue to expect annualised benefit of £25-30m, with approximately half of that benefit coming in FY2023.  In John Crane, we are simplifying our organisation to better serve customers and maximise growth opportunities.  In Smiths Detection, we are improving efficiency to strengthen operating leverage as growth accelerates.

In HY2023 we charged £8m for these savings projects with a further £27m-£32m expected to be charged in the second half. These charges are included as non-headline items.

PEOPLE

Inspiring and empowering our people is our third key priority.

The health and safety of our employees is our number one people priority, building on our world-class safety record.  In the first half of the year, our recordable incident rate improved to 0.4 (HY2022: 0.5) as a result of a multi-faceted safety programme underway across Smiths. 

At the end of FY2022, we launched our Smiths Leadership Behaviours to define our expectations for an inclusive and high-performance culture.  We continued the rollout of these seven behaviours in the first half, with Smiths Culture Champions leading workshops to reinforce and embed these leadership behaviours throughout our organisation, with over 5,000 hours of activities completed.

Along with our Smiths Leadership Behaviours, talent development is a key priority within our People plan, as talent development is foundational to achieving our ambitious business goals. We are focused on growing and promoting talent from within with 80% of open roles now filled internally, versus 40% in the past. We have relaunched the Accelerate Leadership Development programme, a group-wide training initiative focused on building more effective leaders; introduced an Executive Committee mentoring programme to support the career development of high potential leaders; and continued to develop our Early Career programme, which includes a number of engineering apprenticeship programmes.

Diversity, equity, and inclusion also plays a central role.  One component of this is increasing the proportion of women in leadership roles.  Women represent 40% of the Smiths Board and 33% of our Executive Committee, but only 24% of senior leadership.  We are investing in initiatives across the organisation to support and advance the careers of women at Smiths as we strive for an even more inclusive culture.

OUR ESG APPROACH

Environment, Social and Governance ("ESG") performance is central to our Purpose, and we are committed to extending our sustainability leadership.

During HY2023 we published our inaugural Sustainability Report, Sustainability at Smiths, which describes how we are embracing and prioritising ESG performance at Smiths to deliver on our Purpose and create long-term, sustainable value for all our stakeholders.  Our ESG strategy is fully integrated into the Smiths Value Engine with priorities centred on growth, execution and people.

Growth

Through our significant technological capabilities and our strong customer relationships, across the Group we are helping provide sustainable solutions for our customers to enable them to meet their own environmental targets.  An example of this is our partnership with Midrex Technologies Inc ("Midrex") in Flex-Tek to develop a heating solution to be used in the Direct Reduction of Iron ("DRI") process to enable the production of commercial scale "green steel." The Midrex process replaces fossil fuels in traditional DRI steel production with hydrogen.  In John Crane we are well placed to help our customers in their energy transition journey, from methane abatement through to the generation of renewable energy.  John Crane is currently engaged in over 40 carbon capture utilisation and storage ("CCUS") and hydrogen projects worldwide.

Execution

In FY2022, we set and communicated 3 year environmental goals to FY2024 (targets can be found here), which cover reductions in water, waste, packaging, and Greenhouse Gas ("GHG") emissions as well as an increase in the use of renewable electricity. These targets support the delivery of our commitment to Net Zero GHG Emissions for Scope 1 and 2 by 2040, and for Scope 3 by 2050.   The development of Science-Based Targets (SBTs) is also underway.

During the first half we continued to make good progress against our environmental targets, tracking ahead of our 3-year targets for water, waste, electricity consumed from renewable sources and GHG emissions reduction. 

People

Our people play a pivotal role in the success of our ESG strategy, from the engineering capabilities required to design new energy transition products to our robust governance structure. During the first half we established sustainability leaders in each division to help accelerate our plans and deliver against our targets.

To further align our ESG commitments with our priorities, we have included ESG metrics (GHG reductions and energy usage) in both our long-term and our annual incentive compensation programmes across the Group. 

CAPITAL ALLOCATION

With our strong technology, market positions, and financial framework, our highest capital priority continues to be organic growth.  Accretive M&A, either to strengthen core positions or to accelerate penetration of priority adjacencies comes second.  Thirdly, we have a strong track record of returning surplus capital to shareholders, as evidenced by the £241m returned in the first half, on top of the £661m returned in FY22.

Organic investment

In HY2023 we invested £36m in capex projects, including £8m in R&D investment on programmes such as next generation hold and cabin baggage screening and further advancements in our defence portfolio. A further £41m in R&D was charged to the income statement, supporting new product development.

M&A

In HY2023, Smiths Interconnect acquired Plastronics, a leading supplier of burn-in test sockets and patented spring probe contacts.

The acquisition supports our strategy to make complementary inorganic investments which will help accelerate our presence in adjacent markets or expand our product offering. We have an active acquisition pipeline and disciplined M&A approach across the Group.

Shareholder returns

Through the first half we continued to repurchase shares under the £742m share buyback programme which we initiated in November 2021, in connection with our commitment to return the majority of cash proceeds from the disposal of Smiths Medical to shareholders.  As at 22 March 2023, we had returned £657m, and have a further £85m remaining under the repurchase authorisation.

In line with our progressive dividend policy and plan to rebuild dividend cover after the sale of Smiths Medical, the Board is declaring an interim dividend of 12.9p, a year-on-year increase of +5% (HY2022: 12.3p).  The interim dividend will be paid on 17 May 2023 to shareholders on the register at close of business on 11 April 2023. Our dividend policy aims to increase dividends in line with growth in earnings and cash-flow with the objective of maintaining minimum dividend cover of around 2 times.  This policy enables us to retain sufficient cash-flow to finance investment in growth and meet our financial obligations.  In setting the level of dividend payments, the Board considers prevailing economic conditions and future investment plans.

The Company offers a Dividend Reinvestment Plan ("DRIP") enabling shareholders to use their cash dividend to buy further shares in the Company - see our website for details.  To participate in the DRIP, shareholders must submit their election notice to be received by 25 April 2023 ("the Election Date.") Elections received after the Election Date will apply to dividends paid after 17 May 2023.  Purchases under the DRIP are made on, or as soon as practicable after, the dividend payment date and at prevailing market prices. 

Net debt

Net debt³ at 31 January 2023 was £429m (FY2022: £150m), an increase of £279m as we continued to execute our share buyback and paid the final FY2022 dividend. Net debt to headline EBITDA³ in HY2023 was 0.8x (FY2022: 0.3x). 

Borrowings as at 31 January 2023 were £1,208m (FY2022: £1,166m), which comprises two euro denominated bonds, one of which (€600m) we expect to repay when it is due in April 2023. The other (€650m) bond matures in 2027.  There are no financial covenants associated with these borrowings. Cash and cash equivalents as at 31 January 2023 were £795m (FY2022: £1,056m). 

A $800m (c.£650m at the period-end exchange rate) revolving credit facility ("RCF") remains undrawn and matures in November 2024.  The only financial covenant relates to interest cover, under which EBITDA must be greater than or equal to 3 times net interest. Taking cash and the RCF together, total liquidity was over £1.4bn at the end of the period.

STATUTORY RESULTS

Income Statement

The £54m difference between headline operating profit of £241m and statutory operating profit of £187m is non-headline items as defined in note 3 of the financial statements.  The largest components include amortisation of acquired intangible assets of £26m, past service costs for retirement benefit equalisation, scheme administration costs and pension settlement losses of £12m, asbestos litigation in John Crane, Inc. of £10m, and restructuring costs of £8m. Statutory operating profit of £187m was £30m higher than last year (HY2022: £157m), reflecting the increase in headline operating profit.

Statutory finance costs were £(20)m (HY2022: £3m), the increase relates to the prior year £22m foreign exchange gain on an intercompany loan with Smiths Medical which was settled on disposal in January 2022; the matching credit in discontinued operations netted out to zero in total Group earnings.

Total Group profit after tax and EPS

Statutory profit after tax for the total Group decreased to £109m (HY2022: £1,123m) with the prior year including the profit on sale of Smiths Medical.  Statutory basic EPS was 30.6p (HY2022: 283.9p).

Statutory Cash-flow

Statutory net cash inflow from operating activities for the total Group was £100m (HY2022: £182m). See note 16 to the financial statements for a reconciliation of headline operating cash-flow to statutory cash-flow.  

Pensions

Included within free cash-flow is £3m of pension contributions, (HY2022: £6m).  These contributions relate to unfunded, overseas schemes and healthcare arrangements.

It is not anticipated that any further contributions will be made to the TI Group Pension Scheme ("TIGPS"), the liabilities of which have now been insured via a series of buy-in annuities. Smiths and the TIGPS Trustee are working toward final buy-out of the scheme in order to deliver certainty for the Scheme's 21,000 members and remove future risk for Smiths.

The second major pension scheme, Smiths Industries Pension Scheme ("SIPS") is estimated to be in surplus on the Technical Provisions funding basis, and no cash contributions are currently being made.  The Group and the SIPS Trustee continue to work together to progress towards the long-term funding target of full buy-out funding.

The two main UK pension schemes and the US pension plan are well hedged against changes in interest and inflation rates.  Over 90% of their assets are invested in third-party annuities, government bonds, investment grade credit or cash, with no remaining equity investments.  As at 31 January 2023, over 60% of the UK liabilities had been de-risked through the purchase of annuities from third party insurers.

Foreign exchange

The results of overseas operations are translated into sterling at average exchange rates. Net assets are translated at period-end rates. The Group is exposed to foreign exchange movements, mainly the US Dollar and the Euro.  The principal exchange rates, expressed in terms of the value of Sterling, are shown in the following table.

OUTLOOK

The Group is raising the guidance for FY2023 again. We now expect at least 8% organic revenue growth for FY2023, with moderate margin improvement.

John Crane

John Crane is a leading provider of mission-critical engineered solutions, improving our customers' reliability and sustainability in process industries. 61% of revenue is derived from the energy sector (downstream and midstream oil & gas and power generation, including renewable and sustainable energy sources.) 39% is from other process industries including chemicals, life sciences, mining, water treatment, and pulp & paper. 70% of John Crane revenue is from aftermarket sales. John Crane represents 35% of Group revenue.

Revenue

John Crane's strong market position, global service network, and trusted customer relationships underpin its strong first half performance. Organic revenue was up +14.6%, with growth across all segments as the conversion of orderbook to revenue increased. On a reported basis, revenue was up +24.6%, with a £36m favourable foreign exchange impact.

Activity levels remain high across all segments, with +14.2% order growth and a record orderbook going into the second half.

For the business overall, OE revenue increased +13.7%, and aftermarket revenue increased +15.0% on an organic basis.

In John Crane's energy segment, customer demand for both OE and aftermarket is strong, driven by the increasing demand for energy, along with decarbonisation and the transition to clean energy sources.  Revenue from OE sales increased +13.3% on an organic basis.  John Crane's large installed base and leading service offering positions it well to meet the strong demand for aftermarket repairs, maintenance and upgrades, and aftermarket revenue grew +18.5% on an organic basis.

John Crane's OE sales for industrial applications grew +14.1% on an organic basis, driven by strong demand in sectors such as life sciences, chemical processing and pulp & paper.  Aftermarket revenue increased +9.2% with a continued strong orderbook.

Across both its market segments, John Crane customers are requiring systems to be more reliable and energy efficient, interconnected and digitally enabled, and use diverse low-carbon energy sources. These trends benefit John Crane as they require significant investment in new infrastructure and retrofits to existing infrastructure, as well as new technology to reduce cost and accelerate the deployment of cleaner energy.

John Crane is well positioned to support customers through the energy transition.  John Crane is working closely with customers and stakeholders to accelerate innovation across several decarbonisation themes to reduce methane and other GHG emissions, increase asset efficiency, and enable rapid scaling of low-carbon hydrogen, along with carbon capture, utilisation & storage. Recent wins include a large CCUS expansion project in Wyoming, USA, a major blue hydrogen project in Alberta, Canada and multiple green hydrogen projects in Europe.

Operating profit

Headline operating profit of £114m increased +24.6% on an organic basis, driven by increased volumes, pricing actions more than offsetting cost inflation, and management of ongoing supply chain disruption. As a result, margin expanded 200bps to 22.0% (HY2022: 20.0%).

Headline operating profit increased +36.6% on a reported basis, with +£8m of favourable foreign exchange translation. The difference between statutory and headline operating profit includes the net cost in relation to the provision for John Crane, Inc. asbestos litigation and restructuring costs.

ROCE

ROCE was 21.7%, up 150bps, driven by increased profitability.

R&D

Cash R&D expenditure was 2.0% of sales (HY2022: 2.9%), with £11m spent on R&D in the first half. John Crane's innovation is primarily focused on enhancing efficiency, performance and sustainability by using materials science advancements to reduce friction in high duty wet seals, increase maximum rotating speed required in next generation hydrogen compressors and creating state-of-the-art filtration solutions that remove liquids and vapours while minimising pressure losses. John Crane is also developing advanced, digital capabilities that enable operators to accurately predict equipment life, increase asset availability and lower overall cost.

John Crane sealing solutions play a significant role in helping our customers in their sustainability journeys through reducing leaks. Examples include a seal for demanding hydrocarbon pipelines with a unique, patented technology that significantly extends mean time to repair, reducing maintenance, improving efficiency and protecting the environment from potentially harmful leaks. John Crane also launched the Seal Gas Recovery System, a technical solution that recovers the seal leakage and diverts the gas stream back into the process flow to be used in other applications, reducing GHG emissions and cutting valuable product losses.

Smiths Detection

Smiths Detection is a global leader in the detection and identification of threats and contraband, supporting safety, security and freedom of movement.  It produces equipment for customers in the Aviation market and Other Security Systems for ports & borders, defence and urban security markets. 51% of Smiths Detection's sales are derived from aftermarket service.  Smiths Detection represents 26% of Group revenue.

Revenue

Smiths Detection drove accelerated growth across the business as it delivers against its strong multi-year orderbook, with organic revenue growth of +14.0% (£48m) in HY2023. On a reported basis this increased to +24.8% with +£29m of favourable FX translation.

For the business overall, OE revenue increased +20.7%, and aftermarket revenue increased +8.4% on an organic basis.

Revenue from the Aviation market accounted for 68% of HY2023 revenues and grew +10.3% on an organic basis, balanced between both OE and aftermarket as the market continues to recover post the COVID pandemic. The growth in OE is supported by delivery of Smiths Detection's range of 3D Computed Tomography ("CT") machines combined with continued maintenance and software upgrades in aftermarket. Tender activity in Aviation continues to be strong as airports seek to upgrade their security systems to CT technology, in some cases driven by mandated regulations. Recent key wins include checkpoint screening systems for New Zealand, Germany, UK and India and air cargo wins with DHL Australia.

Other Security Systems ("OSS") accelerated growth in HY2023, delivering +22.9% increase on an organic basis.  OE growth was particularly strong, up +39.2% with deliveries across urban security settings, defence and ports & borders. Building out the OSS segment is a key strategic priority for Smiths Detection and H1 growth in the segment demonstrates the progress made.  Key wins in the first half include ports & borders screening in Japan and the US, provision of X-ray scanners for the G20 summit in Indonesia, and provision of lightweight chemical detectors used in defence settings.

Operating profit

Smiths Detection's headline operating profit increased +4.5% on an organic basis, primarily driven by increased volumes. Headline operating profit of £41m was up +16.3% on a reported basis, including +£4m favourable foreign exchange translation. 

Headline operating profit margin was 10.5%, down (100)bps. OE deliveries typically have lower margin than aftermarket services, and this had a 180bps mix impact year on year as a result of the +20.7% growth in OE. Progress was made on cost reduction and SES impact is building.

The difference between statutory and headline operating profit primarily reflects amortisation of acquired intangibles and restructuring costs.

ROCE

ROCE decreased 200bps to 7.2% driven by higher working capital investment to support sustainable growth. 

R&D

Cash R&D expenditure was 8.4% of sales at £33m, up +13.8% on prior year (HY2022: £29m). This includes an increase in customer funded projects to £9m (HY2022: £6m).

Smiths Detection continued to invest in the development of next generation detection devices for the defence market, new algorithms to improve the detection of dangerous goods, and digital solutions to keep people and infrastructure safer.  Certain programmes are co-funded by strategic customers seeking next-generation solutions to security challenges. During HY2023, we launched a next generation dual-view X-ray scanner allowing increased efficiency with a more compact footprint, and further extensions of our automated detection algorithm, iCMORE, to enable detection of prohibited items.

Flex-Tek

Flex-Tek provides innovative solutions to heat and move fluids and gases for aerospace and industrial applications that support energy efficiency and improved air quality. 83% of Flex-Tek's revenue is derived from Industrials and 17% from the Aerospace sector. Flex-Tek represents 26% of Group revenue.

Revenue

Flex-Tek continued to deliver strong revenue growth in HY2023 with organic revenue of +17.0%.  Revenue grew +33.2% on a reported basis, including +£41m favourable foreign exchange translation.

Organic revenue from Flex-Tek's Industrial segment was up +17.5%. Growth was led by strong demand for construction products particularly in heating, ventilation and air conditioning ("HVAC") applications, supported by further capacity expansions. Demand also remained strong for industrial heating products. As expected, Flex-Tek has begun to see a slower rate of growth for its construction products in the second half. 

During the first half, Flex-Tek continued to execute its growth strategy, ramping up production at a new facility in Houston, Texas, supporting the geographic expansion of our HVAC product offering.  Flex-Tek is also preparing to add capacity for its heating solution that will be used as part of the DRI process enabling the production of commercial scale "green steel." Flex-Tek received its first purchase order for the DRI solution, which is being developed in partnership with Midrex, and which is expected to generate revenues from FY24 onwards.

Organic revenue from Flex-Tek's Aerospace segment was up +14.8% as the aerospace market benefits from an increasing number of aircraft builds.

Operating profit

Headline operating profit increased +9.0% on an organic basis, reflecting increased volumes and strong pricing more than offsetting cost inflation. Headline operating profit margin was 19.5%, a decrease of (140)bps as Flex-Tek invested in the start-up costs of the new facility in Houston and marketing costs for our new product platform, Python flexible refrigerant line sets. 

Headline operating profit was up +24.9% to £77m on a reported basis, including +£9m favourable foreign exchange translation.

The difference between statutory and headline operating profit is due to amortisation of acquired intangible assets. 

ROCE

ROCE increased +250bps to 26.6% reflecting the strong acceleration in profit over the last 12 months.

R&D

Cash R&D expenditure remained broadly consistent at 0.4% of sales (HY2022: 0.4%). R&D is focused on developing new products for the construction market, and an expanded product offering in aerospace.

Smiths Interconnect

Smiths Interconnect designs high performance connectivity solutions for demanding applications in the aerospace and defence, semiconductor test, and industrial end-markets. Smiths Interconnect represents 13% of Group revenue.

Revenue

Smiths Interconnect's organic revenue was up +3.3% in H1, an expected moderation from the double-digit growth of the prior year.  Revenue increased by +16.2% on a reported basis, with +£21m favourable foreign exchange translation.

Growth in the first half was driven by strong performance in the industrials sector where demand for Smiths Interconnect's connector solutions remained high, in particular for the recently introduced medical cable assembly product. Revenue for semiconductor test sockets continued to grow in HY2023 but demand normalised during the period, with growth slowing in the second half.

Growth in both aerospace and defence related programmes was impacted by phasing of large programmes in the prior year. Commercialisation of new products such as the 28G optical transceivers and newly launched radio-frequency components offering proven high performance in commercial applications will contribute to growth for the full year. 

During the first half, Smiths Interconnect acquired Plastronics, a leading supplier of burn-in test sockets and patented spring probe contacts. This is a good example of how we use M&A to accelerate penetration of priority adjacencies.  The acquisition of Plastronics strengthens Smiths Interconnect's product portfolio, leveraging Plastronics' attractive positions in Artificial Intelligence, data centres and automotive end markets while expanding Plastronics' geographic reach using Smiths Interconnect's strong presence in Asia.

Operating profit

Headline operating profit decreased (1.7)% on an organic basis as a result of increased investments in R&D to support future growth.

Headline operating profit was up +12.2% to £32m on a reported basis, including £4m favourable FX translation.  Headline operating profit margin was 16.6%, down (30)bps on a reported basis. 

The difference between statutory and headline operating profit reflects the amortisation of acquired intangibles and the integration costs of the Plastronics acquisition and restructuring costs. 

ROCE

ROCE increased +380bps to 15.8%, driven by higher profitability over the last twelve months compared to the prior period. 

R&D

Cash R&D expenditure increased to 6.5% of sales (HY2022: 5.5%). R&D is focused on bringing to market new products that improve connectivity and product integrity in demanding operating environments. 

Products launched in the first half included the new custom grid array technology reducing overall size, weight, and cost of connectors for medical applications; the next generation of high-speed test solutions for data centres and high-performance computing; and the expanded offering of coaxial coupler components designed for mission critical space and defence applications. The business has an expansive new product pipeline, with a further 10 product introductions planned for the second half.